Group of Nineteen

Some days there is less to discuss than others, and this is one of those days. Let me start by explaining that I will no longer produce the interest rate probability table, as it no longer seems likely to add much value. Consider that the BOE just acted last week and is unlikely to do anything until well after Brexit has occurred. Also, the ECB is clearly on the sidelines for a minimum of fifteen months as per their own rhetoric, and likely longer in my view, as inflation will not be making a comeback there soon. The Fed is all but certain to act in December, and the interest there will be about just how many times they hike in 2018 and, finally, Canada has pushed to the sidelines until they have a clearer idea of the US economy and Fed activity. So it seems to me that day-to-day movement in these probabilities are not going to be market drivers for a while.

In the meantime, I would contend the most interesting (puzzling?) thing ongoing is the fact that membership of the FOMC (group of 19) is no longer seen as the perk it once was. Yesterday’s announcement that NY Fed President Dudley will be leaving earlier than anticipated follows the exits of Vice-Chair Stanley Fischer and Governor Daniel Tarullo earlier this year. Obviously, Chair Yellen is being forced to step down, but in my estimation is likely to leave her board seat as well. Other governor’s who reigned during the financial crisis, Kevin Warsh, Sarah Bloom Raskin and Jeremy Stein have since left and their seats have not yet been filled. And on the Regional President side, Richmond President Lacker has resigned and his seat has yet to be filled.

And so, I ask myself, why would so many leave a job with such power and so many perks? The skeptic in me would answer that this group of people, who essentially ruled the financial world for the last decade through their monetary policy decisions, may have figured out that when things turn south, they will be in the crosshairs for all the blame. And they have recognized that the ongoing Goldilocks scenario of improving growth and low inflation is coming to an end. While nobody knows when things will turn, it certainly feels to me like we are much closer than not. This concept would also explain why the Fed Governor seats have been so hard to fill. Who wants to take a job that is going to be blamed by one and all for the next downturn? Of course, the problem is that the Fed is finding itself with a diminished leadership capacity at exactly the time it will need significant and strong leadership. Nothing good can come of this.

Will this impact the dollar? Absolutely! If the Fed loses its luster as the premier central bank in the world, it will not only negatively impact the dollar, but also it will have a significant (and I believe negative) impact on both bond and equity markets. One of the things that has underpinned US economic leadership since the end of WWII has been a strong Federal Reserve. History shows that when politics was driving Fed actions (1971-1979), the dollar was under enormous pressure and the global economy floundered amid stagflation. While today’s macroeconomic situation is clearly different than back then, a lack of Fed leadership in a crisis will be felt around the world. My point is that many of the things about FX that we currently take for granted may be called into question in the future, most notably the dollar as the world’s reserve currency. Again, I am not forecasting that this will happen soon, just that it should now be a risk on the radar. After all, risk management is what every hedger is tasked with.

As to today’s markets, the dollar is generally putting in a good performance, rallying vs. all its G10 counterparts, with the average currency loss about 0.45%. We did see some softer than expected secondary data from the Eurozone but that doesn’t seem to have been the driver. The RBA left rates on hold, as expected, and the statement indicated that they were unlikely to start to tighten policy anytime soon. That certainly has helped undermine AUD this morning. But away from that information, there was precious little else to discuss.

On the emerging market side, the dollar has shown a much stronger general performance with TRY falling 1.0%; and both BRL and ZAR down 0.8%. In fact, the only gainer of note was KRW, +0.3%, which was a reaction to President Trump’s visit and positive comments on the US-Korean relationship. As to the decliners, it seems that the scheduled meeting between Vice-President Mike Pence and Turkish Premier Yildirim was postponed, as visa issues remain unresolved between the two nations. Meanwhile, the rand story seems to be more about its ordinary volatility as there has been neither data nor news of note released. Finally, yesterday saw a substantial BRL rally on the back of the strength of oil and commodity prices in general, and this morning, the lack of follow through there seems to be weighing on the real.

Looking ahead, there is little in the way of data today, just the JOLTS report (exp 6.075M) which has had very limited impact over time. We also hear from new Fed Governor Quarles, but his topic of discussion doesn’t seem to be related to monetary policy. In other words, it is another day with no clear drivers to follow. Equity futures are little changed this morning, offering no clues to direction there, and Treasuries have given up a bit of their recent gains, but remain beneath the key 2.40% level. If pressed, I would say we are likely to see the dollar soften a touch in the NY session, as I can find no real driver for its overnight strength. But don’t look for too much movement overall.